Cleantech, in all its myriad forms, represents the greatest investment opportunity in the 21st century. Whether you are looking at opportunities in the US, EU or China, the scale of investment required to rebuild our energy infrastructure on a low-carbon base is staggering.
In 2008 alone, venture capital (VC) and private equity (PE) funds sank over US$15 billion into cleantech projects around the world, and more than US$100 billion was raised in asset-backed financing across the sector. Although these numbers dropped precipitously in the first half of 2009 to US$3 billion and US$30 billion respectively, cleantech is the largest VC investment area.
Thanks to a combination of government policy, market demand and ability to implement, China is one of the most attractive cleantech markets. Yet investors have been relatively conservative in their approach, with cleantech spending less than 10% that of the US. In addition, while three-quarters of US investment goes into alternative energy, only 20% of China’s money has targeted those relatively higher-risk areas. Energy efficiency and traditional energy are far more popular.
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But Chinese VCs have been pragmatic. Over the past decade, many US investors have miscalculated what is required to commercialize new "clean" technologies. They were raised on a diet of software and internet deals – relatively short development times, reasonably small-ticket investments, and no regulatory framework or distribution barriers to bringing technologies to market. Cleantech is exactly the opposite. It takes more time and money, and involves dealing with incumbent distribution networks (power grids, transportation fuel distributors, building contractors) that have huge centralized buying power and control access to end users.
Chinese investments, on the other hand, have been mostly in growth stage companies, not necessarily technologically innovative, but relatively low-risk in deployment. Early solar successes, for example, came from manufacturing panels at low cost and selling them into highly subsidized Western markets.
New and emerging technologies amplified by the unbounded entrepreneurial energy in China will lead to an explosion of start-ups and innovation in cleantech. Coal efficiency and emission reduction, industrial wastewater treatment, wind, energy storage and smart grids are all likely to perform well. The lack of fiscal discipline in capital deployed against the solar sector will drag on returns, while at the same time possibly accelerating the next generation of thin film solar technology.
With the scale as well as the political structure to place and finance pilot projects China might be better-equipped than the US or Europe to develop a robust cleantech industrial base. However, significant barriers exist to Beijing realizing its cleantech ambitions.
True innovation is hamstrung by limited fundamental research, which receives less than 10% of the funding of US research in real dollar terms. At the same time, the lack of a strong peer review process at Chinese universities’ research institutes allows marginal technologies and poor research methodologies to receive support and funding well past the appropriate level. This creates additional risk for early stage VCs who are looking to back innovative new technologies in China.
More importantly, it means the country’s development in emerging areas – synthetic biology, thin film solar, batteries and fuel cells – continues to be derived from US or European technologies.
Perhaps most troubling are recent restrictions by Beijing on imports of wind turbines and photovoltaic cells, no doubt driven by a desire to protect domestic industry. China’s ongoing push for access to next generation technologies from overseas has not been backed up (yet) by a firm commitment to protect foreign intellectual property in cleantech sectors. Actions such as these will inhibit the country’s ability to create world-class domestic firms.
There are certainly internal issues that Beijing must overcome if it is to emerge as a world leader in cleantech development and manufacturing. However, on balance, the combination of private capital and expertise, together with an ability to eliminate regulatory and financial barriers to new technology commercialization, have turned China into a fearsome competitor.